Imagine a financial tool that combines the power of insurance and investment in a single package. That is exactly what a ULIP offers. A ULIP insurance policy offers life cover while allowing you to invest in equity, debt, or balanced funds, depending on your risk appetite. For those who stay invested long term, a ULIP can be a rewarding way to grow wealth while protecting loved ones. But what if you decide to cut short the journey? Surrendering your ULIP can be tempting in moments of financial stress or dissatisfaction with returns. Before you take that step, it is vital to understand the implications.
What is the meaning of a ULIP?
ULIP stands for Unit Linked Insurance Plan. When you buy a ULIP, your premium is divided into two parts:
- A portion goes towards providing life insurance coverage.
- The remaining is invested in market-linked funds, such as equity or debt.
Policyholders enjoy flexibility such as switching between funds, adding riders, or adjusting protection levels. One of the major advantages is the ULIP plan tax benefit, as premiums qualify for deductions under Section 80C of the Income Tax Act.
Can ULIP be surrendered before the lock-in period?
By design, ULIPs come with a mandatory lock-in of five years. If you surrender before this period ends, the funds will not be immediately returned to you. Instead:
- The money is moved to a Discontinued Policy (DP) fund.
- Discontinuance charges are deducted from the fund value.
- You can only access the money once the five-year lock-in ends.
During this time, your money remains invested in the DP fund and earns a modest interest, though significantly less than what active market-linked funds may deliver.
What happens when you surrender ULIP early?
The decision to surrender early comes with certain consequences:
- Termination of insurance cover: Once surrendered, the life cover offered by your ULIP insurance ends immediately.
- Discontinuance charges: These are deducted upfront, reducing the amount transferred to the DP fund.
- Opportunity cost: You lose the compounding benefits of staying invested for 10–20 years, which is when ULIPs typically deliver their best returns.
- Tax implications: If surrendered within five years, the ULIP plan tax benefit claimed earlier may be reversed. That means the deductions you availed under Section 80C could be added back to your taxable income in the year of surrender.
How do you surrender a ULIP policy?
The process is relatively straightforward, though it varies by insurer. Generally, you need to:
- Fill and sign a surrender form.
- Submit identity and policy documents.
- Wait for the fund value (post charges) to be transferred to the DP fund.
If you change your mind, some insurers allow policy revival within two years of surrender, provided you pay all due premiums and charges.
When is surrendering a ULIP a practical choice?
Surrender should ideally be the last resort. However, it may be reasonable in situations such as:
- Consistent underperformance: If your ULIP consistently delivers lower-than-market returns even after fund switches.
- Financial hardship: When you need immediate liquidity, you will only receive the funds after five years if surrendered before lock-in.
- Better alternatives: If your long-term financial goals are better served by a different product.
Yet, if the ULIP is performing well, experts recommend staying invested beyond the minimum five years to truly unlock the benefits of compounding and fund growth.
Tax considerations when surrendering a ULIP
The tax impact of surrendering is often overlooked but can be significant. Consider this scenario:
Someone who invested ₹1.5 lakh annually in a ULIP for three years claimed deductions under Section 80C each year. If the policy is surrendered in the fourth year, all earlier deductions are reversed. That means the taxable income rises by ₹4.5 lakh in the year of surrender, leading to a much higher tax bill. Had the same policy continued for 15–20 years, not only would the ULIP plan tax benefit have been fully valid, but the fund would also have compounded to create substantial wealth.
This underlines why surrendering early can hurt both your tax planning and long-term financial security.
Alternatives to surrender
If you are unhappy with your ULIP, instead of exiting completely, you can consider:
- Fund switches: Move from equity to debt or vice versa, depending on market conditions.
- Partial withdrawals: Allowed after the five-year lock-in, letting you access funds while keeping the policy alive.
- Premium redirection: Change the allocation of future premiums to different funds.
These options can give you flexibility without sacrificing the dual benefits of ULIP insurance.
Conclusion
Surrendering a ULIP is not just about filling out a form; it has far-reaching financial and tax consequences. You lose your insurance cover, face discontinuance charges, and may even see your earlier tax benefits reversed. On the other hand, continuing with a ULIP for 15–20 years allows you to enjoy the synergy of wealth creation, protection, and tax efficiency.
Aviva India offers a range of ULIP options tailored to different life goals, blending long-term growth with security. Before you decide to exit, weigh the short-term relief against the long-term value you stand to gain. In most cases, patience rewards better than premature surrender.
